The Apparel Market: Five Key Trends to 2025

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10 minute read

 

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Report highlights

This report identifies five key industry trends that will shape the apparel industry (clothing & footwear) towards 2025. It forms the second report in a series which looks at category-specific trends to 2025 (click here for Grocery trends). These insights are critical for retailers and brands in order to enhance their performance by using data-driven research to underpin more sophisticated strategies.

 

The report is divided into 7 main sections:

• Introduction

• Trend 1: Shift to online: huge growth carries a cost

• Trend 2: Reimagining stores: showrooms, micro-fulfilment & personalisation

• Trend 3: Digital innovation: Social commerce & the Metaverse

• Trend 4: Supply chains: Mitigating disruption & cost pressures

• Trend 5: ESG & the circular economy: from fast fashion to resale

• Conclusion

 

 

Introduction

Apparel retailers are being stress tested by unprecedented pressures. Ongoing disruption from the pandemic, the shift to online, supply chain issues, and macroeconomic uncertainty have all intensified existing challenges.

The cost of fuel and raw materials has soared, including cotton, which hit record highs last year. Transport costs also remain elevated, while high return rates and a lack of warehouse space is driving up inventory expenses.

Such disruption is undermining some business models more than others. Whereas luxury brands have more pricing power and higher margins to manage cost pressures, fast fashion retailers are centred on low prices, thinner margins and rapid lead times.

Nevertheless, retailers and brands will need to adapt their propositions to maintain relevancy and satisfy an ever-expanding set of customer needs and expectations, while battling rising operating costs and ongoing supply disruption. This will be tough for an industry where profit margins have been on a downward trajectory for the last decade.

This report identifies five key trends that will shape the success of UK fashion retailers in the years ahead:

1. Shift to online: Huge growth carries a cost

2. Reimagining stores: showrooms, micro-fulfilment and personalisation

3. Digital innovation: Social commerce and the metaverse

4. Supply chains: Mitigating disruption and cost pressures

5. ESG & Circular economy: from fast fashion to resale

 

Trend 1 - Shift to online: huge growth carries a cost

The COVID-19 pandemic has heightened the influence of digital across all stages of the customer journey. This has led to a permanent step change in the proportion of apparel sales occurring online.

Consumer appetite for discovering and purchasing apparel online is now firmly entrenched. Retail Economics forecasts online to account for over half (50.4%) of UK apparel sales in 2022, compared to 35% in 2019 pre-pandemic. By 2026, online sales are projected to account for 60% of apparel sales.

 

Figure 1. Online now accounts for over half of UK clothing sales

Source: Retail Economics

 

Digital shift across the entire customer journey

Digital technology is firmly at the epicentre of most people’s lives, whether communicating with friends and family, remote working, or shopping. Digital’s influence has become more pronounced across all stages of the customer journey for apparel. From the awareness of fashion brands and products to service and returns, many consumers have been exposed to new digital-first customer journeys (Fig 2), breaking down initial barriers of setting up online accounts, entering payment details and overcoming issues of trust.

 

Figure 2. The acceleration to online has rewired the customer journey

Source: Retail Economics

 

The shift to online comes at a cost

Pure online apparel retailers typically operate on considerably thinner margins than their physical or multichannel counterparts. Our analysis shows pre-tax profit margins for pure online apparel retailers across Europe averaged 3.7% before the pandemic (2015-2019), compared with 13.4% for the overall apparel industry.

Even during the pandemic when online retailers enjoyed exceptional levels of demand which boosted profits, pre-tax margins remained below industry averages (Fig. 3).

Although bricks-and-mortar retailers are tied to higher fixed costs for their store estates, they generally achieve greater profit margins on each transacted sale.

Pre-tax profit margins for pure online apparel retailers across Europe averaged 3.7% before the pandemic (2015-2019), compared with 13.4% for the overall apparel industry.

Conversely, online pure plays have lower fixed costs (e.g. fewer premises and employees) with smaller profit margins on each item. This is because of significantly higher variable costs such as marketing, packaging, shipping costs, and managing greater returns volumes.

 

Figure 3. Online runs on thinner margins: profit margins versus industry averages

Source: Company results, Retail Economics analysis

Increased transparency online also intensifies competition and limits retailers’ pricing power, leading to further margin erosion. Our research shows that the growth of online during the pandemic diluted profit margins across the entire apparel industry, putting retailers’ business models and cost structures to the test.

 

Higher return rates

The shift online has triggered a rise in the volume of products returned to retailers – especially for apparel. Although free and lenient return practices can be leveraged to incentivise online sales, it also encourages many consumers to over-purchase viewing it as a ‘risk-free discovery’, rather than a ‘final purchase’ (the concept of ‘wardrobing’). This is particularly applicable when shopping for clothing and footwear online, as size, styles, textures and finishes can be difficult to convey digitally.

Retail Economics research shows that the average returns rate for online apparel purchases can be as high as 27%, compared to around 12% for store purchases. Gen Z shoppers (under 24 years) are the most prolific returners (Fig. 4). They return approximately twice the number of items compared to seniors (65+ years).

 

Figure 4. GenZ the most prolific returners of apparel online

Source: Company results, Retail Economics analysis

 

Purposely over-ordering has become normalised for online apparel shopping. Nearly half (44%) of Gen Zs order multiple variations of clothing and footwear items online, beyond what they intend to keep.

For retailers, increased return rates quickly erode profit margins. Returns are more costly and complex to process than outbound logistics, involving problematic reintegration of products back into the supply chain, assessing condition for re-sale, and processing refunds. The cost of handling a return can be up to twice as much as the original delivery when factoring for labour, transportation and warehousing.

Whereas a return in-store can be processed quickly, online purchases must be returned via a courier, sent to a warehouse, unpacked, cleaned, and then put out for re-sale. The extra processes involved can create inventory backlogs, resulting in excess stock and price markdowns as clothes miss their season. Some fashion retailers are taking steps to discourage serial returners by charging customers for the privilege – Next implemented such a plan in 2018, and Zara recently began charging shoppers to return online orders by post. Crucially, items bought online can still be returned for free in-store.

The average returns rate for online apparel purchases can be as high as 27%, compared to around 12% for store purchases.

As a strategy to make better use of store networks to drive footfall, this works well. Next says c.75% of returns are made at its physical stores, reducing margin erosion and increasing the likelihood of repeat purchases.

But for retailers without physical stores, such benefits realised by free “return to store” options are not available; and charging for returns without a free alternative risks alienating shoppers altogether.

There is no one-size-fits-all solution to the issue of returns, but charging for them and leveraging technology to help shoppers accurately assess products can help significantly. Many successful retailers will need reverse logistics and stock management solutions (in-house or third party) that minimise return rates and associated costs. They might also impose policies that incentivise returning items in-store, or even dissuade over ordering in the first instance. Operating subscription models that offer free deliveries while building lifetime loyalty is yet another approach that.... [excerpt]  

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